Due Diligence Framework for ICO: Ukrainian Experts Overview

The initial coin offering (or ICO) is experiencing an unprecedented boom today, but, unfortunately, more than half of projects based on the release of cryptocurrency is nothing more than a scam. However, to become unsuccessful, they do not need to be a scam initially as there are many other factors that make investing in such projects risky, like regulatory authorities or KYC/AML. There is a need for a critical evaluation of the startup for those who want to invest their money in it, especially in Ukraine as it is pioneering in blockchain technologies.

Usually, the projects emit coins that have no value outside their service attracting two major groups of investors: those willing the coin price increase after some period of time; those who want to use the service and get more opportunities by investing in it. Each case needs special research to find out the pros and cons of investing like described in this source. Here we will talk about how to still comprehensively examine the project during the due diligence and answer the following questions:

if the project resembles a scam;

what risks does it have;

what are the real capabilities of the project (as opposed to the goals announced.)

That’s not the only questions you should ask yourself before investing in ICO, but they are the mains. Maybe in the next posts, we will tell you a bit more about other issues you may face during working with ICO. So let’s start!

How Do We Check People?

The Due Diligence process can be tough enough, so we recommend to run it if the sum is really considerable: something like $50,000 investment getting no more than 5% of the token emission. And now, the analysis starts with overviewing the personalities concerned in the projects, namely:

Founders. The founders can tell us much useful info about the project. We analyze such points as

are they just virtual people or real ones;

does their skill set matches the project;

their experience in other projects (especially blockchain-related);

how long they are acquainted;

their community credibility, etc.

Celebs, advisers, and team. The same we do with other project participants:

consider the advisors’ publicity;

previous experience, especially on the advisors’ position;

their actual presence on the project;

how many projects they are working on simultaneously;

community credibility;

previous scam participation.

Investors. The blockchain makes the money transfer observation transparent, so it’s easy to track the wallets contributing to the startup. But even there the deception can be revealed: some startups claim they received money from funds that had no connection to them. Special attention should be paid to the origin of considerable sums such as 1000 ethers or 20 bitcoins and higher during the ICO.

Where to get the info? There are many useful open sources of data like social networks or other media the personalities use to approach their audience, as well as communities, criminal entities connections bases, and blacklists (INTERPOL, FATF).

What Do You Need to Know About the Project?

Audience evaluation. At this stage, we are interested not only in the audience itself but in the way the team approaches it too. Usually, it includes: people who already have cryptocurrency and are well aware its liquidity is not high, so it’s a good idea to exchange into something useful; people who are interested in the services. The marketing means get through them using the founders’ influence in social media, approaching the audiences of the existing projects and potential users databases via mailing lists, groups, channels, messengers. So, it’s useful to consider the communication strategy of the projects (opinion leaders blogs, SMM, advertising campaigns, etc.) and its executors (like project team or specialized contractors.)

We also check the project visibility in Similarweb, Alexa, Google trends, and track mentions (and their tone) in Slack, Telegram, Crunchbase, Angel.co, Reddit. The problem with blockchain in Ukraine and in the world, in general, is that its communities are rather young and the experts are difficult to approach. You can also examine team profiles and project references.

Project. When we analyze the project, we pay special attention to the information that could prove or disprove the project is real:

company’s foundation story;

evidence in mass media;

the project’s jurisdiction;

if the product already exist and are there any users;

ratings and revenue (if any);

corporate clients.

What else can deliver the useful information is an ability to run the project without Blockchain and what are the sources of money it’s going to spend on ICO.

Each project should have a whitepaper, which should be detailed and comprehensive, without errors or inaccuracies. However, if it looks excessively good, then re-check the facts are true.

Technology & ICO Check

Another problem in evaluating the project is the impossibility to check the technology itself. The only thing we can rely on is that the IT community will check everything they can. Such websites as GitHub, BitBucket, and CoinGecko provide recent updates, appraisals, comments, manuals within the code, discussions, and forums for you to make certain conclusions during your Due Diligence. Check also if the smart contract works in the way described in the whitepaper, as well as the project scalability, openness, block size, fees, transaction throughput, etc.

When it comes to the ICO, what we look at is the business model, token design, security audit, volume, price, discount, time, criteria for success, minimum and maximum purchase, distribution of tokens, and so forth.

Takeaways

ICO now is the quick and convenient way to get the funds for a startup requiring no bureaucracy and time delays. However, not every project is well compatible with it, which can lead to a disaster; moreover, it attracts scammer activities too. These tips are for you to reduce the risks of such investments and help you find the successful project. So be careful with new projects and may the ICO Force be with you!